Setup cost

Setup cost is those costs incurred to configure a machine for a production run. This cost is considered a fixed cost of the associated batch, so its cost is spread over the number of units produced. Setup costs include the following:

  • Labor to position tools and materials next to the machine
  • Labor to configure the machine
  • Scrap cost of test units run on the machine

The real cost of a setup is the time wasted while a machine is not operational, since this can represent lost income (if there is a backlog of work). Consequently, there is usually an emphasis on shortening equipment setup times in order to reduce setup costs.

Related Courses

Accounting for Inventory 
Cost Accounting Fundamentals